Thursday, June 16, 2011

A Well Stated Criticism of Karl Polanyi

‘When advancing the case for ‘free markets ‘ classical liberals are often chided for failing to recognise the wisdom of Karl Polanyi. In The Great Transformation Polanyi claimed that the pursuit of a ‘free market’ system is chimerical. Historically such an economy did not emerge spontaneously but was the result of social engineering by a nineteenth century state heady on the ideology of Adam Smith. Prior to this period it is alleged that markets and the pursuit of personal gain barely existed and that the responsiveness of people to price signals and incentives is merely a construct of modern economics. According to Polanyi, the result of the great social experiment with markets in the 19th century was a period of social dislocation which resulted in a widespread movement to regulate capitalism and build the welfare state. The market economy, therefore, is neither free in its origins and neither can it be left free to function without intervention of the state. Rather, markets should be recognised as ‘embedded’ in a nexus of social norms and institutions which emphasise solidarity and not as autonomous, freely operating structures in which the state misguidedly ‘intervenes’.

Notwithstanding Polanyi’s enduring popularity on the left his supposed insights are either historically inaccurate or based on a crude misrepresentation of classical liberalism. First, the vast majority of modern historical research on the origins of markets ably summarised by Hejeebu and McCloskey contradicts Polanyi’s central claims.* (Hejeebu, S., McCloskey, D.(2000) The Reproving of Karl Polanyi, Critical Review, 13 (4) …

… classical liberalism has never claimed that narrowly selfish behaviour is all that is required to sustain the social fabric. Of course markets are always ‘embedded’ in a broader nexus of institutions, but the question we need to ask is precisely what sort of institutional and social norms are required to facilitate social cooperation on the widest possible scale. Polanyi and his followers prefer to rely on hackneyed accounts of the Wealth of Nations rather than recognise that Smith’s support for markets and ‘self interest’ constituted part of a broader ethical system set out in the Theory of Moral Sentiments. Specifically, Smith was concerned to elucidate the balance between the social norms appropriate to contexts of commercial exchange and those appropriate in more intimate environments. From Smith’s point of view feelings of sympathy which include love, friendship and reciprocity are reserved for people of whom we have detailed personal knowledge. The morals expected in commercial relations which are often between relative strangers, however, tend to be more impersonal , focussed on principles such as the observance of contracts and are oriented more towards the ‘self interest’ of the parties involved rather than the direct benefit of ‘others’. The great mistake is to suppose that the type of ethos that pervades family life or that in tight knit communities can operate on a much wider scale. The development of inclusive markets requires a more impersonal ethos which enables people to engage with diverse actors who may not share the same moral outlook. If people deal only with those who share the same moral outlook or trade only with ‘locals’ rather than engage in transactions with ‘foreigners’ then the sphere of potentially cooperative relationships will be reduced. The alternative to self-interest is not solidarity, but suspicion if not outright conflict.…

So, the next time you are confronted with an opponent waxing lyrical about Polanyi’s supposedly profound insights on the status of markets and political economy, invite them to read some history – and some Adam Smith.’

CommentI agree that many people with whom I interact (and who should know better, being historians of economic thought) seem to be uncritical of Karl Polanyi’s thesis (no major markets prior to 19th-century capitalism and his consequent hostility, and those of his followers, to modern markets).

Morris Silver showed in detail that Polanyi’s thesis was not tenable in classical times. Even the simple fact that Rome’s vast armies were paid in coins that were spent in the local economies where they were stationed is dismissed, or that money changing from foreign into local currencies in temples dotted all over Europe was an important function of their more secular sides.

Polanyi’s theses were contrived to justify an ideological prejudice against markets, part-sociological speak at best. His knowledge of Adam Smith’s works was weak, as was his knowledge of history.

3 Comments:

As a leftist historian, I agree with a good deal of the thrust of this post. Reading Polanyi is like reading Marx in this regard - they do have some very good insights about modern sociology/political economy, but neither of them actually know their history very well at all. Much of their work in this area is didactic and poorly sourced. That doesnt, however, necessarily make their conclusions wrong, if only by chance.

On markets in the classical era, Moses Finley is certainly much stronger than Polanyi, but backs up some of his claims much better. Its certainly true that the Roman world had markets, and coinage, and it even had a small class of what is essentially modern day speculative merchants and investors (check out Jean Andreau's Banking and Business in the Roman World if you are interested in that class). The key difference, however, is that, particularly at the higher levels, the goal was not the profit motive, but social status, in particular government status and land ownership. The elite would make highly inefficient investments in land and buying political office, since the marker of a man was not his wealth, but his estates, and his place in government. The capitalist marketplace may have existed on the ground, but it had yet to form in the mind. That only forms later (though much earlier than Polanyi claimed).

Furthermore, on Adam Smith's misrepresented ideology, I think your criticism is partially off base. Everything you said is absolutely true - Adam Smith was not just Ayn Rand in Edinburgh, and his works had moral and institutional aspects as well. What Smith wrote, however, isn't nearly as important as what people believed he wrote, and in the nineteenth century and the twentieth century many leading businessmen, politicians, and thinkers cherry-picked from his work to suit their own purposes, creating a super-rationalist, free market world view that Polanyi was pushing against. Polanyi is using Adam Smith as a symbol - its not what he actually wrote that matters, but what he came to represent.

Thank you Timothy for your informed contribution.In the 1940s when Polanyi’s Great Transformation was composed and published, Adam Smith’s legacy was not as well known among the general public as its Lost Legacy has become in its distorted form today (the ‘IH’ and all that wrapped in ‘laissez-faire’ notions – the former in the isolated throw away lines of faculty in the oral traditions the two Cambridges, and the latter in the interested proclamations on behalf of mill and mine owners in the 19th century, turned into ‘theories’ of which Smith had played no part). Ayn Rand was so detached from Adam Smith as to be a parody of his life’s work. Polanyi, like others, uninformed of his writings portrayed an Adam Smith fitted to suit his purposes.

Thank you for the additional references to the history of markets I am certainly interested in the history of trade. Your sentence: ‘The key difference, however, is that, particularly at the higher levels, the goal was not the profit motive, but social status, in particular government status and land ownership’ is most interesting. The drive for social status seems endemic in all societies. Among warriors, military prowess is an evident drive – the prizes were not only the fruits of war, but also social status and whatever went with that (including sexual access – this is often noted in hunter societies in modern times).

I should add here that the role of women in the upper reaches of societies (of all levels of development) has been unrecognized as major pressure points for necessaries (the better quality items picked from the ‘same pile’ as the poor – Adam Smith’s parable of the rich man’s son), of ‘conveniences’ (for more of them) and for ‘amusements’, or luxuries, which were to prove the undoing of the powerful feudal lords. Hence, it’s not just how the males were judged socially at the top, it’s also how females judged them, and themselves.

In all these areas the market place was to play an increasing part driving change. We can see that in the modern obsession with ‘celebrities’ and the trends they create and follow. The ‘profit market’ is in this sense not quite as important in corporate capitalism as might be thought from solely reading modern economics texts. Profit – or even access to flows of funds – is less a prime or sole motive than is thought. The ‘marker of men’ has many sides and depths, most of which are stripped away in an equation that has room for only two variables.

What popular opinion considers important is not sufficient for informed judgment.

Well, putting aside whether Polanyi knows his history well enough while watching the ridiculous drama in the Eurozone I'm thinking "Karl Polanyi". The (perverted?) market asserts its logic on various societies and the societies start to fight back. Of course I'm watching from the left side of the dark force.